TBG DISCONTINUED OPERATIONS AND RESTRUCTURING

12 Months Ended

Jun. 30, 2019

Discontinued Operations and Disposal Groups [Abstract]

TBG DISCONTINUED OPERATIONS AND RESTRUCTURING

The Beautiful Group (TBG):

In October 2017, the Company sold substantially all of its mall-based salon business in North America, representing 858 salons to The Beautiful Group (TBG), an affiliate of Regent, a private equity firm based in Los Angeles, California, who operated these locations as franchise locations until June 2019. In addition, the Company entered into a share purchase agreement for substantially all of its International segment, representing approximately 250 salons in the UK, with TBG who operates these locations as franchise locations.

The Company classified the results of its mall-based business and its International segment as a discontinued operation for all periods presented in the Condensed Consolidated Statement of Operations. The operations of the mall-based business and International segment, which were previously recorded in the North American Value, North American Premium and International reporting segments, have been eliminated from ongoing operations of the Company.

In fiscal 2018, the Company fully reserved for an $11.7 million promissory note due from TBG which related to amounts due as part of the original transaction (working capital and prepaid rent) as this promissory note included forgiveness clauses if certain conditions were met, that the Company believed would be met.

In fiscal 2019, the Company fully reserved for amounts due from TBG, primarily related to notes and accounts receivable for inventory TBG purchased from the Company and outstanding royalties due.

In June 2019, the Company entered into a settlement agreement with TBG regarding the US and Canadian salons, which, among other things, substitutes the master franchise agreement for a license agreement. Pursuant to the settlement agreement, the Company released and forgave TBG from amounts due related to inventory shipments, fees, services and accounts and notes receivables, plus accrued interest. The Company had previously reserved for such amounts due from TBG in fiscal 2018 and fiscal 2019.

The following summarizes the results of TBG related charges and TBG discontinued operations for the periods presented:



	Fiscal Years
	2019			2018			2017
	(Dollars in thousands)
Revenue	$	—		$	101,140		$	423,427

TBG Mall Restructuring:
Accounts and notes receivable reserves	$	20,711		$	—		$	—
Other charges	1,105			—			—
Total TBG mall restructuring	$	21,816		$	—		$	—

TBG Discontinued Operations:
Working capital and prepaid rent receivable reserve	$	—		$	11,697		$	—
Other charges (1) (2) (3)	1,221			47,848			15,244
Loss from TBG discontinued operations, before taxes	1,221			59,545			15,244
Income tax expense (benefit) on TBG discontinued operations (4)	(7,117		)	(6,360		)	—
Loss (income) from TBG discontinued operations, net of tax	$	(5,896	)	$	53,185		$	15,244


(1)	In fiscal year 2019, the Company recorded professional fees related to the transaction as well as insurance adjustments associated with the discontinued operations.


(2)	In fiscal year 2018, the Company recorded $43.0 million of asset impairment charges, $6.2 million of cumulative foreign currency translation adjustment, $3.6 million of loss from operations and $6.8 million of professional fees.


(3)	In fiscal year 2017, the Company recorded a loss from operations.


(4)	Income taxes have been allocated to continuing and discontinued operations based on the methodology required by accounting for income taxes guidance.

The Company utilized the consolidation of variable interest entities guidance to determine whether or not TBG was a variable interest entity (VIE), and if so, whether the Company was the primary beneficiary of TBG. The Company concluded that TBG is a VIE based on the fact that the equity investment at risk in TBG is not sufficient. The Company determined that it is not the primary beneficiary of TBG based on its exposure to the expected losses of TBG and as it is not the variable interest holder that is most closely associated within the relationship and the significance of the activities of TBG. The exposure to loss related to the Company's involvement with TBG is the carrying value of the amounts due from TBG and the guarantee of the operating leases. As of June 30, 2019, prior to any mitigation efforts which may be available, the Company remains liable for up to $41 million associated with remaining TBG salon lease commitments, should TBG not perform. The Company is also potentially liable for up to $2.2 million of payments to assist with operating expenses over the next six months.

Smartstyle restructuring:

In January 2018, the Company closed 597 non-performing company-owned SmartStyle salons. The 597 non-performing salons generated negative cash flow of approximately $15 million during the twelve months ended September 30, 2017. The action delivers on the Company's commitment to restructure its salon portfolio to improve shareholder value and position the Company for long-term growth. A summary of costs associated with the SmartStyle salon restructuring for fiscal year 2018 is as follows:



	Financial Line Item	Fiscal Year 2018
		(Dollars in thousands)
Inventory reserves	Cost of Service	$	656
Inventory reserves	Cost of Product	586
Severance	General and administrative	897
Long-lived fixed asset impairment	Depreciation and amortization	5,460
Asset retirement obligation	Depreciation and amortization	7,680
Lease termination and other related closure costs	Rent	27,290
Deferred rent	Rent	(3,291		)
Total		$	39,278

In addition, the Company recorded approximately $1.9 million of other related costs to the SmartStyle restructuring, primarily warehouse related costs. Substantially all related costs associated with the SmartStyle salon restructuring requiring cash outflow were complete as of June 30, 2018.